Experts Reject Australia Housing Bubble

Australia is not experiencing a housing bubble, but the central bank says it’s keeping a close eye on the property market amid a recent resurgence in home prices.

Reserve Bank assistant governor Christopher Kent said home price growth had recently shown signs of renewed strength, particularly in Sydney and Melbourne, with most of the growth coming from the investor market.

"Are we concerned about it? Well, we are always careful to watch these sorts of developments," Dr Kent told a Bloomberg economic summit in Sydney on Tuesday.

"We've been at great pains to always tell people that when you're making investment decisions, make them with great care.

"Don't assume prices will always go up, don't assume the price increase that we've seen in the past is a reflection of where prices will be going in the future and don't always assume interest rates will stay low for the length of your loan."

Home prices have risen by more than 16 per cent in Sydney over the past year, and almost 11 per cent across all the capital cities combined, according to the latest figures from RP Data.

David Rees, head of Australasian research at Jones Lang LaSalle, said although Australian housing was very expensive compared to much of the rest of the world, there was no housing bubble.

A housing bubble is when prices move away from fundamentals, but in Australia's case, prices were responding to fundamentals, like low interest rates, population growth and an undersupply of new housing, Dr Rees said.

He said restrictive planning laws had created concerning affordability issues in the Sydney market.

"If you make it difficult and expensive to produce houses through a range of policies and if you encourage people to live in a congested area, in other words, increase demand and reduce supply, then the market will do what it's supposed to do, which is prices going up," Dr Rees said.

"There's good reason to be concerned about (affordability) because it's pretty tough getting into the Sydney housing market, especially if you're a first-home buyer."

Kelly O'Dwyer, chair of a parliamentary inquiry into foreign investment in residential real estate, said investigations were underway into whether foreign investment, though crucial to supply, was creating competition for first-home buyers, potentially locking them out of the market.

There was evidence to suggest current foreign investment restrictions were not being enforced by the Foreign Investment Review Board (FIRB), she said.

"FIRB have demonstrated that they have not been doing their job in that regard," Ms O'Dwyer said.

"I think there's been a failure of leadership at FIRB."

Ms O'Dwyer said she was open to the idea that first-home buyers be allowed to tap into their superannuation to help them get a foot on the property market ladder.

Anyone who buys thinking that prices always go up is kidding themselves and almost deserves to lose money. However, given expectations regarding general population trends dictate that unless something is done to ease chronic housing supply shortages, homes becoming more expensive will become the reality.

What I disagree is the definition of the bubble. Markets react to scenarios on a simple basis of supply and demand; The prices will only go up if demand is greater than supply. What distinguish a bubble from a normal reaction is whether the demand is valid or otherwise it is artificially created. In Australia's case rapid rises in prices combined with investor's demand (i.e. speculation of future price growth) has lead to this situation. Once the houses become too expensive for first homebuyers to get in and speculative demand cools because of financial conditions, strained loans will be defaulted and since there is no buyer that can afford, prices will correct to an acceptable level!